Carnival Earnings Call: Does Cold Weather Bring Higher Cruise Fares?

December 22, 2010
Earnings-Call (5:05 p.m. EST) -- Buoyed by ballooning cruise fares, industry giant Carnival Corp. earned $2 billion during the year, making it the world's most profitable leisure travel company in 2010.

At its fourth quarter (Q4) and full year earning's call, all manner of subjects were discussed, including the financial -- and psychological -- impact of November's Carnival Splendor fire, how freezing weather boosts fares and the fact that fuel surcharges don't seem to be in the cards for 2011. Looking forward, tea leaves and financial indicators point to a successful wave season, the period between January and March in which large numbers of cruisers book their vacations at sea. (The upshot: Consumers will almost certainly pay more than they did last year for summer cruises.)

Deals or No Deals?

Wave season and the frigid Northeast. There may be an uncontrollable force that boosts cruise fares -- cold weather. Carnival Chairman and CEO Micky Arison explained: "Historically, when you have early cold snaps in the north here, generally speaking, that starts to get people thinking about getting away to warmer climates, and obviously we have a lot of warm-weather cruises. So we would anticipate that that would help boost wave, but it's not something that you see instantly."

Did the Splendor headlines scare would-be cruisers? Robin Farley, a leisure analyst with UBS, asked if media images of Carnival Splendor, powerless and adrift in the Pacific, had a temporary impact on the booking trend. That is, were potential customers persuaded not to book by what they saw? "We didn't see any impact at all," answered Arison.

Winter crowds in the Caribbean means soft-ish fares. As execs have noted in previous calls, tremendous capacity in the Caribbean this winter -- ships stationed there include the 4,100-passenger Norwegian Epic, 5,400-passenger Oasis-class ships and 3,690-passenger Carnival Dream -- is resulting in slightly softer pricing than last year. Arison offered an illustration. "The issues in the Caribbean are created by seasonality. You have 75,000 more beds in the Caribbean in Quarter 1 [winter] than Quarter 3 [summer]. It's almost like the Las Vegas strip moving into the Caribbean for Q1."

Prices in the Mexican Riviera, Europe, Alaska? Up. On the other hand, pricing in Alaska, Europe and the Mexican Riviera is nicely higher, according to the line. In the Mexican Riviera in particular, where overall capacity has decreased (Royal Caribbean's Mexican stalwart Mariner of the Seas has been redeployed, Carnival Splendor is out of service until February), prices have climbed.

Do the Math

As to the financials, the world's largest cruise company -- which operates 98 ships across 11 cruise lines that include Princess Cruises, Costa Cruises, Carnival Cruise Lines and luxury Seabourn -- posted a net income of $248 million on $3.5 billion in revenue during Q4 of 2010 compared with $193 million on $3.3 billion in Q3 of 2009. For the full year, Carnival had a net profit of $2 billion (on $14.5 billion in revenue), up from $1.8 billion ($13.5 billion in revenue) in 2009.

The improved profitability is most attributable to -- you guessed it -- higher ticket yields. Net ticket yield increased 3.9 percent year over year in Q4, and according to the company's public numbers, more than 75 percent of revenue is generated by cruise fares.

On the cost side, expenses (excluding fuel) were up 1.6 percent for Q4 year over year. Enter the bottom line chomp taken by the Splendor fire. According to the line, take the fire out of the equation and net cruise costs would have been down. The "voyage disruptions," the euphemism for the Splendor incident, cut into profits by some $.07 per share . . . or $56 million.

Future Tense: Fewer New Ships, Fuel Surcharges

Carnival Corp. will deliver four ships in 2011, including Aidasol (for Germany-based AIDA Cruises), Carnival Magic, Seabourn Quest and Costa Favolosa. The new-builds represent a 5.2 percent capacity increase and will push the company's fleet total above 100. So what about future new-building strategy? The position will remain the same for the next few years, said Arison. It'll be two or three new ships a year for the foreseeable future.

But cutbacks to the new-build machine may contribute to higher fares down the line. "We're finally at that day when supply growth has slowed," said Howard Frank, vice chairman and chief operating officer. "In my opinion, over the last couple of years the capacity has outstripped demand, which has been exacerbated by the economic situation. I think [slowing capacity] is a good sign that we should see some good growth in ticket prices going forward."

Fuel surcharges, another favorite topic of the analysts, also came up. Arison was clear. "Our position on that has not changed at this point," he said. Frank added a little more color. "When you have these huge, fast spikes, it's easier to justify a fuel surcharge," he noted. "But I don't see that in the cards, though -- not based on where we see fuel for this year." Arison jumped back in with a rhetorical puzzle of sorts. "We put out a position on that, and if that position changes, we'll put out another statement."

Interesting Moment: Fuel's Combustible Financial Impact

David Bernstein, Carnival Corp.'s senior vice president (finance) and chief financial officer, offered some insight on how the price at the pump can impact the bottom line. According to Bernstein, a 10 percent change in fuel price represents a $180 million impact to the company. Based on current spot prices for fuel, forecasted fuel costs for the full year are expected to increase $134 million compared with 2010.

--by Dan Askin, Associate Editor

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